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Governance
Standing Out in an Uncertain
reform
Center for International Private Enterprise
Corporate
Governance
The Intersection of Public and
Private Reform
United States Agency for International Development
Introduction
The Linkages between
Corporate Governance
and Development
Successful development efforts demand a holistic approach, in which various programs
and strategies are recognized for their important contributions to progress and prosperity. In
this regard, linkages between corporate governance and development are crucial.
Yet, corporate governance and development are strongly related. Just as good corporate
governance contributes to the sustainable development prospects of countries, increased
economic sustainability of nations and institutional reforms that come with it provide the
necessary basis for improved governance in the public and private sector. Alternatively,
corporate governance failures can undermine development efforts by misallocating much
needed capital and resources and developmental fallbacks can reinforce weak governance
in the private sector and undermine job and wealth creation.
The linkages between corporate governance and development are explored further in this
publication. The authors focus on several distinct themes.
They highlight the differences that exist in corporate governance frameworks between
developed and developing countries. This helps put corporate governance reforms in the
context of institutional change in developing countries, stressing the need for structural
changes required for good governance to take root in the private sector.
The authors also discuss how good corporate governance contributes to combating
corruption, which remains one of the greater threats to development around the world.
Simply put, good corporate governance makes bribes harder to give and harder to conceal,
and it also contributes to the broader climate of transparency and fair dealing.
These and other issues related to corporate governance, job creation, poverty reduction,
and democratic reform are discussed in the pages that follow. Many of the arguments often
lead to the point that corporate governance cannot exist in a vacuum – it depends as much
on the country’s overall institutional development as much as it relies on the internal
practices of companies. Therefore, in order to strengthen private sector governance, it is
imperative that efforts also focus on the reform of the judicial systems, property rights,
freedom of information, and other institutions vital to democratic market economies.9 10
From Sustainable
Companies to
Sustainable Economies
Corporate Governance as a
Transformational Development Tool
Aleksandr Shkolnikov
and Andrew Wilson
Center for International Private Enterprise
Introduction
For democracy to deliver, reform efforts must focus on improving economic institutions as
well as political structures. Despite some impressive growth figures, many fragile
democracies continue to face pressing economic problems such as poverty, infrastructure
decay, limited access to basic resources, and lack of private sector jobs. Resolving these
issues should be on the top of the agenda for everyone involved in the development
community. If these economic issues are left unaddressed, they lead to serious widespread
dissatisifaction that undermines the legitimacy of governments and leads to reversals from
the course of democratic and market reform. Economic issues, such as energy or food
shortages, often have political consequences and solutions.
The economic and political landscape of the world has certainly changed over the past
several decades. Building on their recent success, whether from export-driven growth or
natural resources, emerging markets are set to overtake developed countries in terms of
overall economic wealth in the coming decades. Much of the attention to growth and
development in emerging economies, however, has been confined to BRIC countries – Brazil,
Russia, India, and China. Although not without their own set of problems of unequal income
distribution and poor social conditions, these four countries have certainly redefined the
power nexus and are becoming major players in the global arena.
But, what about the rest of the developing world? What prospects do smaller countries
have going forward? As dozens of other emerging markets outside of BRIC continue to
struggle to attract investment, create jobs, and achieve functional democratic governance,
the need for working approaches to reform remains pressing. How can the rest of the world
address the socio-economic challenges that persist despite an unprecedented rise in the
number of electoral democracies over the past several decades?
Of course, there is no one source of and no one answer to the many of the issues facing
emerging economies today. In countries exhibiting strong macroeconomic growth, it is not
uncommon to see the benefits out of reach for the poor because of the unequal distribution
of income and opportunity. In countries struggling to break out and reduce poverty through
sustainable economic means, much of the economic activity remains trapped in the informal
sector, where entrepreneurial survival rather than business growth and development best
describes the private sector.
Many of the fragile democracies exhibit governments that are seldom accountable to their
citizens beyond elections. In such countries, day-to-day decision-making processes remain
opaque, unpredictable, and impenetrable for outsiders, while economic systems are being
tailored to benefit the insiders.
Key Points
Corporate governance has a much broader application • than improving internal company procedures, important
in their own right. Corporate governance encompasses a wide variety of tools that also address the
environment within which companies operate – i.e. issues associated with the institutional development of
countries.
In addition to attracting investment, improving • competitiveness, and managing risks, corporate governance is
fundamental to changing the relationship between business and state in many emerging markets. By injecting
transparency into the equation, corporate governance helps to remove cronyism, corporatism, and favoritism,
instead facilitating an open exchange between the private sector and government.
By helping countries to attract investment, facilitating • institutional reform, reducing opportunities for corruption,
increasing competitiveness, and promoting minority shareholders rights protection, corporate governance helps
to build a foundation for economic growth, job creation, and private sector-led poverty alleviation.
There are two types of drivers of corporate governance • reform. One set of drivers is associated with failures and
collapses. A more proactive set of drivers has much to do with companies’ and countries’ search for
investment, the need to improve competitiveness, and gaining access to regional and international markets.
Both have been responsible for increased attention paid to corporate governance over the past decade.13
Corporate governance is applicable to a wide variety of • companies, not just large multinationals listed on
major stock exchanges. As a means of introducing transparency, accountability, responsibility, and fairness in
company decision-making structures, various corporate governance mechanisms can benefit many different
companies – including SMEs and family-owned firms not listed on stock exchanges – seeking to build
sustainability and remain competitive. In many emerging markets, the emphasis must be placed • on the
enforcement of the existing corporate governance mechanisms. While developing new tools is important,
reformers must pay closer attention to the already existing mechanisms and seek ways to ensure that they are
consistently implemented and enforced for all market players. Although the debate continues on voluntary
versus • mandatory systems of corporate governance, reformers must seek to integrate the business
community in the process of developing corporate governance mechanisms in either one of the systems.
Getting the business community engaged in the process early creates a sense of ownership and provides
ample opportunities for valuable feedback and effective implementation. Ultimately, the creation of corporate
governance value • systems combined with the strengthening of basic rights and legal institutions contribute
to the development of stable and democratic societies.
Monterrey Consensus
In March 2002, 50 heads of state, over 200 ministers and leaders from the private sector, civil society, and all the
major inter-governmental financial, trade, economic, and monetary organizations participated in the International
Conference on Financing for Development in Monterrey, Mexico. The conference adopted the Monterrey Consensus,
which maps out a strategy for addressing poverty and other most pressing problems facing countries around the
world.
“Our goal is to eradicate poverty, achieve sustained economic growth, and promote sustainable development as we
advance to a fully inclusive and equitable global economic system.”
Leading Actions:
Mobilizing • domestic financial resources for development.
Mobilizing • international resources for development: foreign direct investment and other private flows.
International • trade as an engine for development.
Increasing • international financial and technical cooperation for development.
External • debt.
Addressing • systemic issues: enhancing the coherence and consistency of the international monetary, financial,
and trading systems in support of development.
Throughout the many initiatives captured within these categories, the Monterrey Consensus outlines how
democratic governance and market economies can help to reduce poverty around the world. Focusing on the role
of the private sector and economic solutions to poverty, the Monterrey Consensus is a fundamentally important
document that captures world leaders’ commitment to sustainable poverty reduction strategies.
For more, visit:
www.un.org/esa/sustdev/documents/Monterrey_Consensus.htm
to the most basic public services taken for granted in developed countries. While MDGs have
been successful in drawing the world’s attention to these problems, the framework outlined
in the UN Millennium Declaration has left the field wide open as to which strategies should
be implemented to achieve poverty alleviation and to facilitate the development of more
prosperous societies.
Building market economies, unleashing entrepreneurship, strengthening governance,
promoting investment, securing property rights, and combating corruption are some of the
reform priorities that have been identified as key to reducing poverty and moving countries
up the development ladder. The UN’s own “Unleashing Entrepreneurship” report and the
Monterrey Consensus are just two of the many initiatives that have succinctly captured
reform issues that countries must address to reduce poverty. Countries’ own institutional
deficiencies, however, remain a real barrier to implementing many of these
recommendations.
Despite notable successes in reducing poverty in some places, we often find that foreign
aid does not reach its intended recipients. Corruption continues to rob the poor while
anti-corruption programs stall in red tape and bureaucracy. Elites enjoy access to the
benefits of trade and investment while regular citizens are left out. Entrepreneurs are
forced to operate in the informal sector without access to legal mechanisms to enforce
contracts and protect private property. Public funds devoted to building infrastructure
and providing public services end up in the pockets of crooked government officials and
their cronies. Jobs are not being created to accommodate the burgeoning youth
population.
Values of Corporate Governance
Transparency, responsibility, accountability, and fairness – these four concepts are now widely quoted as the key
principles of good corporate governance.
The original definition of corporate governance, outlined above, is built around the concept of accountability. It
stems from the belief that owners entrust the managers with running their company and they can hold them
accountable for any violations of the contract. Accountability, in that sense, requires the functioning of supporting
institutions, both internal and external.
When we speak of transparency in a corporate setting, we focus on the timely and proactive disclosure of financial
and other information to shareholders. Such disclosure can be voluntary or mandatory depending on the market
and legal environment within which companies operate.
In the corporate governance framework, fairness ensures equitable treatment of minority shareholders, employees,
managers, and other agents. Rules and mechanisms of good governance in the private sector seek to eliminate
discrimination and establish a clear, predictable environment conducive to long-term investment planning.
The concept of responsibility deals with the integrity of markets and citizen’s trust in market institutions and
corporations. Responsibility has both internal (owners-managers-employees) and external (business-society)
application in the business environment.
Source: The World Bank
Mapping a Corporate Governance System
Ultimately, to reduce poverty, reformers must attack the very causes of it – weak institutions
that squander resources, undermine fair competition, reward corrupt behavior, and restrict
private sector development and job creation. What mechanisms do we have to promote
institutional reform? How can we move people up from the bottom of the development
pyramid? How can the power of the private sector be best utilized to reduce poverty and
improve living standards? These are the questions that countries and the development
community continue to answer as the deadline for achieving MDGs quickly approaches.
Corporate Governance as a Development Tool
At a first glance, corporate governance may seem like an odd answer to the questions
outlined above. After all, the popular perception of corporate governance is that it is
something more applicable to multinational corporations, large stock exchanges, and CEOs
rather than average entrepreneurs, SME loans, and job creation. Corporate governance is
frequently discussed in the context of complex accounting procedures and disclosure
mechanisms and certainly not in the context of poverty alleviation. Yet, a closer look at
corporate governance, its broader application, and, most importantly, its institutional
underpinnings, underscores its role as an essential component of public governance and
private sector development, both of which are recognized poverty alleviation solutions. This
paper uncovers some of these linkages.
But such a narrow view of corporate governance – as a tool only useful for large
corporations, with many shareholders and powerful managers, listed on stock exchanges in
developed countries – is increasingly questioned by reformers and business communities
around the world. Weak corporate governance, for example, has been linked to the inability
of countries to attract investment, financial collapses, persistent corruption, failures of
privatization, weak property rights, and many other development challenges countries
around the world face. As such, many economies are warming up to the idea that good
corporate governance is essential to their overall health. Companies are
The increased accountability of corporate directors through the duties of care and loyalty
required by good governance means that strategic decisions affecting performance and risk
are made with greater care and consideration for owners. What duty of care and duty of
loyalty mean is that directors should make best-informed decisions in the interest of a
company. As seen in recent years, the markets, shareholders, and regulators have increased
their scrutiny of director performance, creating demand for qualified directors and
institutions that can provide them with training, information, and networking opportunities.
Boards themselves are becoming more sophisticated in the way they control risk factors
with independent audit and executive compensation committees becoming commonplace,
and board composition increasingly turning to the appointment of independent directors to
ensure transparency and accountable decision-making. In many emerging markets,
however, the integrity of independent directors often comes into question, as their decisions
may still be influenced by dominant shareholders. Yet, these newly effective boards drive
internal reforms that enhance efficiency, control risk, and represent shareholder interests
more fairly.
Much more important for developing countries, although it has been long unrecognized as
such, is the right side of the chart that captures the external mechanisms that help
complete the corporate governance framework. Broadly speaking, both the private side and
regulatory side make up what can be called an institutional framework where corporate
governance is implemented. Just as this institutional framework affects corporate
governance mechanisms and its enforcement, at the same time, it is itself influenced by
corporate governance.
This circular relationship between internal company practices and the institutional
environment in which companies operate has not always been recognized. In trying to
strengthen corporate governance in emerging markets, many efforts in the past focused on
the left side of the chart – building up internal company practices. However, as it has
become evident over the last decade, internal company practices are inseparable from the
environment in which these companies operate. While institutions in developed economies
may be established or functional, they are weak. In some emerging markets seeking to
improve governance within the private sector, institutions are missing altogether.
Addressing these institutional deficiencies along with internal company practices is crucial to
the success of corporate governance reforms.
At its most basic level, a well-developed corporate governance system ensures the rule of
law is applied to all companies and that the property rights of shareholders, and the broader
rights of other stakeholders (lenders, suppliers, and employees, etc.) are defined and
protected. The foundation of these protections is a well-functioning court system capable of
adjudicating commercial law as well as exercising true independence in the protection of
property rights.
Building on this foundation are a variety of public and private institutions that define
corporate governance practice and enforce its implementation. Stock exchanges, through
their listing requirements, and securities markets, with regulators and enforcement actions,
form the front line of external control. These institutions also guarantee property rights
through providing share owners an efficient exit mechanism from ownership, an important
element in attracting investment.
Ultimately, the creation of these value systems, combined with the strengthening of basic
rights and legal institutions, contribute to the development of stable and democratic
societies. Good corporate governance requires sound public governance, viable civil society,
and an active and independent media which can monitor boardroom actions. By extension,
it requires good corporate citizenship on behalf of companies who must respond to the
broader concerns of their stakeholder community, and operate in a responsible and
transparent fashion. Moreover, the same values described above – transparency,
accountability, responsibility, and fairness – also underpin democracies, and by
strengthening corporate governance one also provides tools to make democracies work.
For countries where the institutions described above do not exist or are weak, corporate
governance provides an avenue for bringing institutional reform issues to the forefront and
to begin addressing them. It should be noted that even in systems that possess weak
external institutions, strong internal corporate governance provides value for companies and
is worth pursuing as end in itself. Academic research has indicated that investors in high-risk
emerging markets with poor public governance, will pay a higher premium to invest in well-
governed companies that offer improved financial information as well as better protection
for minority shareholders.
Family firms
Corporate governance is also applicable to family firms, which are prevalent in Asia and
the Middle East and North Africa, as well as in Latin America. While family firms are not
traditionally associated with the conventional model of governance failures as owners and
managers are one and the same, governance issues in family firms are proving to be of
major concern in issues of attracting investment and ensuring sustainability in the second
and third generation of owners. For example, without clarified rules for management and
decision-making, how can you resolve disputes among different owners
Corporate governance is also important for state-owned enterprises (SOEs). Not only do
good governance practices increase productivity in and competitiveness of SOEs, they also
help to ensure that public funds invested in these enterprises are not mismanaged and are
spent effectively. By creating more transparent and economically viable SOEs, corporate
governance also helps to ensure that services are actually delivered to the public. Further,
as state enterprises often provide a bulk of employment in some emerging markets and a
variety of essential public services, good governance helps to prevent failures with
devastating social impact. In many countries, corporate governance has been used as a
means of not only improving the efficiency of SOEs, but also as a mechanism to improve
their attractiveness to investors, thus increasing state income from privatization.
Within the framework of economic development, access to credit is often cited as one of
the biggest challenges facing private enterprise, especially in economies where capital
markets are underdeveloped and banks serve as a key source of capital for growing
businesses. However, local banks often are a poor source of affordable credit, and they
themselves can be sources of economic risk, as was evident during the Russian financial
crisis of 1998. Insider lending, often leading to default, is a major source of risk in many
emerging markets where weak legal frameworks and poor central bank oversight allow bad
loans to be made. When this is combined with a business community where poor
governance practices at the company level serve to hide the true financial condition of loan
recipients, risk levels often drive interest rates to unattainable levels.
As such, in many emerging markets, corporate governance has the potential of being an
effective risk mitigation tool in the financial sector. U.S. Federal Reserve Basel II guidelines,
for example, have pushed for more responsible behavior from banks to increase
preparedness for failures and to ensure proper evaluation of risks. Yet, the same guidelines
fall short of identifying the mechanisms for achieving these goals. Corporate governance, in
this regard, fills the void and can be viewed as an effective tool to strengthen bank stability
and profitability and, more importantly, it can be used to successfully evaluate the risk of
failure in making loan decisions.
By requiring better financial information from companies before making loans, banks can
encourage the adoption of sound accounting systems and regular reporting even in
economies dominated by family-owned and closely-held companies. In this light, the
banking sector can promote good governance in economies where companies do not
naturally rely on stock exchanges to raise capital.
Within banks, improved board governance starts through greater transparency in loan
decision-making, wherein directors and related parties must disclose lending relationships.
In other words, high-risk insider lending can be contained through duty of care and loyalty.
Extending the concept of risk management through board guidance and better supervision
of management lending practices, potential loss-making and insider lending can be
curtailed, thus improving overall loan performance and reducing the cost of credit.
As a result, corporate governance promoted within and through the banking system can
contribute to economic stability through better bank oversight, as well as improve risk
management and drive down the cost of capital – thereby generating growth.
When examining the legacy of privatization in transition economies during the 1990s,
much of the corruption, shareholder abuse, and self-dealing that resulted can be directly
tied to the failure of the state to establish and require effective governance mechanisms
within privatizing firms. Asset stripping, share dilution, and the “tunneling” of capital by the
owner/managers were features of the “wild west capitalism” that afflicted many former
communist economies and did much to discredit early popular notions of capitalism and
democracy. Corporate governance, therefore, has a crucial role to play not only in readying
firms for privatization, but in preventing the potential market mayhem that can occur when
firms privatize without effective internal controls, reporting mechanisms, and shareholder
protections.
Instituting sound internal corporate governance measures into state-owned firms prior to
privatization is crucial to ensuring a smooth transition to private ownership both prior to and
after the privatization process. Good internal accounting and controls contribute to effective
evaluation and can enhance value by reducing investor costs associated with transitioning
accounting practices and building internal control systems. Establishing a model of board
governance and management accountability prior to privatization also facilitates a smooth
transition to private ownership/governance models.
Consider the typical corruption dilemma from the private sector viewpoint – although
corruption is bad for business, individual companies that engage in corruption receive a
short-term advantage. Taking into the account the damaging effects of corruption on the
overall economic health of an economy, the question becomes, “How do you set up a
system that makes it hard for companies to engage in corruption, even if corruption seems
desirable for those individual companies?” The issue becomes solving a collective action
problem – shaping incentive structures in a way that the private sector commits to
responsible business practices, exposes corrupt behavior, and does not allow corruption to
become part of doing business.
The reforms to do this can come from many different directions. On the government side,
there can be checks and balances systems, reform procurement codes, the implementation
of independent audits, legal reform, the simplifcation of tax codes, using e-government
systems, and concentrating on enforcement of existing rules and regulations. Yet, there are
reforms we can also implement on the part of the private sector, limiting, as outlined above,
its ability to engage in corruption.
One such reform is corporate governance. Consistent with the view of corruption outlined
above, corporate governance reduces the number of corruption opportunities by making
bribery harder to conceal, positioning it not only as an immoral but also illegal behavior with
personal costs to those who provide bribes, and outlining internal penalties for violation.
Effective corporate governance means that transparency values are present, investors
receive timely and relevant information, decision-making is not done behind closed doors,
decision-makers are held accountable for their actions, and managers act in the interest of a
company – not their personal interests. The bottom line is that effective corporate
governance makes it hard for companies to provide bribes or other company resources to
government officials in exchange for services.
As a corruption-fighting tool, corporate governance reduces the scope for corporate
employees and directors to engage in self-dealing and or corrupt practices with public and
private counterparts on a number of levels. On the level of values, corporate governance’s
focus on a director’s duty of care and loyalty rule out self-dealing and provide sanctions for
directors who place their own personal interest and gain above those of the company. On a
more practical level, tightened internal controls and financial reporting allow managers and
directors to ensure that transactions with suppliers and vendors, as well as dealings with
government officials, remain above board and free of corruption and self-dealing.
The role of the independent director as prescribed by good governance standards also
reduces the probability of self-dealing through peer scrutiny. This can be reinforced through
independent director participation in the board audit committee, which provides an
independent guarantee of an audit’s credibility. One example is the Business Principles for
Countering Bribery (BPCB) developed by Transparency International with the help of
business leaders and non-governmental organizations. The principles address political and
philanthropic contributions, gifts, hospitality, and even facilitation payments, the topic that
has generated some heated debates in regards to corruption. Implementing the principles
requires that boards of directors take formal responsibility for their actions, effective whistle-
blowing channels exist, internal control measures are embedded in decision-making, formal
accounting procedures set up that check for bribery, and there is internal communication
and training.
Conclusion
The broader view of corporate governance, as a set of mechanisms that deals with
institutional reform and not just company-level changes, suggests that it is one of the
integral components of successful development strategies. Corporate governance is
fundamentally central to building competitive economies, reducing the private sector side of
corruption, promoting property rights, and creating jobs and wealth – all of which are
components of successful poverty alleviation efforts. The development community must
take a closer look at how corporate governance can be used as a tool to improve public
governance and promote democratic and market-oriented reforms.
Ultimately, however, efforts to promote corporate governance must take into account the
drivers of reforms – both positive and negative. On the negative side, drivers of corporate
governance are most frequently associated with financial failures and corporate scandals.
This set of drivers suggests a reactive approach to corporate governance reform. A more
proactive approach is associated with positive drivers, which include search of investment,
increased competitiveness, and efforts to combat corruption. Seen in this light, corporate
governance can be used as a tool to spur broad-based reforms in the areas of investment
and company laws, property rights protection, enforcement mechanisms, accounting and
tax laws, judicial reform, and others.
While the international community has many different corporate governance tools ready
for implementation, reformers must avoid the temptation of copying successful initiatives
from elsewhere. Successful institutional reforms require building local capacity and
commitment to reform efforts, not transferring policies from one set of books to another.
Seeking access to capital and entry into global markets, the private sector in many
emerging markets can become a true leader in corporate governance reform, allowing the
benefits of transparency, responsibility, fairness, and accountability to spread across society
and help millions to escape poverty.
Most developed markets do not exhibit such significant levels of state ownership and
control. Capital markets are well-established in developed economies, including a set of
active investors, a well-informed media, and properly run pension funds that fulfill their
fiduciary role. Developed markets tend to interpose on governance issues from different
perspectives, giving the idea and implementation of corporate governance greater weight in
comparison to emerging economies. Developing countries, in contrast, may have
governance rules in place, but enforcement is inconsistent and selective, with the degree of
adoption dependent on the dominant business or political interest in the country. The
unreliable enforcement of corporate governance standards, compounded by a lack of
external actors influencing governance, creates the perception that corporate governance is
part of an arbitrary process in emerging economies – fueling the notion that corporate
governance is negotiable.
One of these challenges, for both public and private entities, is the HIV and AIDS
epidemic, an issue that directly affects corporate governance in South Africa. While
companies invest in their human capital, that capital is diminished by HIV and AIDS. The
epidemic affects firm-financed health systems, impacts pension planning and reflects poorly
on boards of directors. South African companies must continue their innovative cross-sector
approach to address these challenges as part of their good governance and economic
sustainability efforts.
Amidst so many standards and ideals, some feel that businesses have lost sight of what
governance was about in the beginning: introducing exemplary practices and behavior in
the board room that take a company beyond the minimum legal requirements. Corporate
governance should be a tool for boards to measure performance and effectiveness of their
operations, providing a transparent way to report results to shareholders.
In some cases, corporate governance has mutated into a checklist of ideals that
companies either embrace or reject. In these situations, corporate governance becomes
alienated from the global context, rendering it practically irrelevant. Multinational
corporations (MNCs) use corporate governance as a type of risk management by which they
protect themselves from exposure in harsh business environments. In developed markets,
the compliance approach to corporate governance has worked for MNCs because active
investors and a well-informed media keep track of companies’ performance and hold them
accountable. By contrast, emerging markets lack these external checks, leaving governance
to be more integrated into business strategy as a way to establish and distinguish
credibility, and to raise capital or take on debt to finance growth. Since capital and debt flow
from developed markets that are sensitive to risky investments in emerging markets,
building credibility becomes vital to fostering investment.
Though global context is vital, companies must keep in mind that if corporate governance
is implemented simply to address certain external standards and obligations, the approach
comes from the wrong angle. Corporate governance should be implemented because of its
continuous constructive and substantive benefits to a company, including a more positive
public image.
The basic principles of governance highlight their role as a tool to combat corruption. The
board, appointed by shareholders, should establish standards, policies, and control systems
to uphold ethical practices at all levels of business. While cultures and business
environments differ from market to market, standards should be the same, and should be
mandatory. Ethics are not a negotiable part of business. Choices and negotiations in
standards affect the quality of work and success of the company. Board directors and
managers are responsible for upholding the quality of services and products and have
responsibilities to maintain and grow the assets of the business, and are held accountable
when standards are compromised.
Corporate governance codes must also be adaptable to the business environment where
they work. For example, codes have been adapted to fit the dynamics of family-owned firms
so that in emerging economies, where family-owned firms are likely to be in their first or
second generation, families know best how to adapt standards of governance to
accommodate the fact that all the firm’s actors are related. In Africa, society tends to see
firms as having a greater role within the community than merely the production of profits for
shareholders, creating tension and sensitivity around the issue of corporate citizenship and
leaving the development of corporate governance at a standstill.
Lately, there has also been interest in moving back to state-owned enterprises
implementing corporate governance, reprising the issue of political governance. Another
consideration concerns interested investors – are they more active at home or in emerging
markets? And do they exhibit consistency in their behavior in both locations? As institutions
increasingly invest around the world, cross-border voting issues become more important as
leaders wait to see which international regulatory systems will survive.
As a result, independent directors in emerging economies usually are not a majority of the
board. Additionally, unlike developed economies where, at a minimum the board members
have the authority to appoint the CEO with full rights to take over, in an emerging economy
like Russia, controlling shareholders have the ultimate power. CEOs have to manipulate
rules and relationships to have any amount of authority to lead the company in the right
direction. There is widespread opinion that founders, as the owners of the companies, bear
the main risks and therefore have the right to make the final decision.
There are some occasions of controlling shareholders abusing their authority. However,
they usually realize that it is not in their best interest to abuse their power. These abuses
should be evaluated according to the standard of internationally accepted best corporate
governance practices. One power-abusing controlling stakeholder does not necessarily imply
that his firm poses a higher risk to investors than other firms.
The ownership structure of Russian companies represents yet another difference between
emerging and developed economies. In emerging economies, there is usually one controlling
shareholder, several groups of minority shareholders, and a concentration of minority
holdings. The controlling shareholder usually holds 52 to 55 percent of the company, while
shareholders of investment funds usually hold another 20 to 25 percent. Thus, shareholders
representing up to 80 percent of a company’s outstanding shares are either the owners of
the stock or have permanent authority to represent their interests. The remaining shares are
in the hands of anonymous small retail investors. As a result of the ownership share
concentration, decision-making often a breaches any understanding between the controlling
shareholder and various investment funds.
As in many developed economies, board members who represent special interests sit on
company boards in emerging economies. However in Russia, unlike developed economies, it
takes very little authority to nominate someone to the board. If one member has enough
votes, he or she can elect anyone to the board without consulting existing board members.
Therefore, minority shareholders often conflict with controlling shareholders over boards,
board members, and other issues wrought by myopia, a lack of legitimate business
strategies for small holders, and out-of-control selfishness.
Portfolio investors introduced corporate governance to Russia when they pressed foreign
companies operating in the country to go beyond simple corporate law. They succeeded in
persuading only with the largest companies to adapt to international best practices. Since
their investments were merely speculative, their interest in promoting corporate governance
was short-term.
With time, Russian companies decided to form their own standards of governance, hoping
to improve their initial public offering or to raise capital from international investors. Further
incentives to develop internal governance came from a growing interest in mergers and
acquisitions and by investigations initiated against Russian companies by regulatory
authorities abroad. This change led to the perception of corporate governance as a tool to
attract investment, rather than improve operations. As a result, internal control and risk
management fell under the broad category of management instead of an independent
program.
To limit corruption, boards should ensure that an internal audit is independent from
company executives. In addition, the board should have regular communication with
auditors. Those found at fault through internal audit should be dismissed from their positions
only with the approval of the board. In addition, shareholders should be duly informed of the
benefits of transparency. They should know that the burden of corruption is carried by
everybody, regardless of the industry or size of the company. Shareholders also suffer from
the corruption of executives, parent companies, and subsidiary companies.
There are still many obstacles to implementing corporate governance within state-owned
enterprises. Governmental officials have little incentive to change and no systematic
approach to control or monitor performance of the managers they appoint. These
government officials, as supervisors and board members, face temptation to accommodate
CEOs and top managers at the expense of government interests. To overcome this obstacle,
the government should establish a clear program with regard to state-owned enterprises. It
has to determine the status of state-owned enterprises, and which should be privatized
short-term, middle-term, or long-term. The government program should begin with
instituting standards of transparency and reasonable, public selection criteria for
government-appointed directors. The promotion of government officials, who work as
government-appointed directors, must be linked to their performance against pre-
established criteria. Finally, the government should introduce basic components of good
corporate governance before the process of privatization begins.
There are also generational changes and trends in corporate governance that need
attention to keep companies competitive. As competition grows and companies become
more complex, there is a constant necessity for new business ideas and better risk
management. Companies must stay current despite the succession of their founders, and
regularly bring new faces to the board. Tangible improvements can be seen at holding
shareholders’ meetings around Russia, in the dissemination of corporate information to
shareholders, and in the transparency of board elections and performance records.
However, these positive changes have been spreading very unevenly in Russian business
community and are most concentrated in large companies.
From the business view point, corporate governance practices contribute to a company’s
increased performance and sustainability in two ways. First, through formalization of the
decision-making process, so that those inside and outside the company can determine how
decisions are made, who makes them, and who can be held accountable. Second, corporate
governance minimizes potential conflicts between various owners via proper planning and
communication between key company stakeholders.
Corporate governance is different in its application across the globe and it varies
according to the degree of economic development of a country. The differences between
corporate governance in developed and emerging economies are often reflected in the
ownership structure, level of ownership concentration, the competence of the judicial
system, and the development of an entrepreneurial culture in a given country. A great
discrepancy exists between the entrepreneurial vision within the business community of a
developed country and that of an emerging economy. Additionally, business education plays
an important role in addressing corporate governance problems in any economy.
Educational programs that share and promote ideas, knowledge, and vision facilitate an
efficient dialogue to further develop the surrounding environment for implementing good
corporate governance.
The biggest challenge for a family business is competitiveness. Family businesses are not
excluded from or immune to market forces, and will fail if they are not competitive. While
some suggest that the biggest challenge for family businesses is succession planning or the
family decision-making process, business decisions should be market-oriented and not
family-related.
Even in closely held companies, like family businesses, there is a public interest that
needs to be protected. Many economic conditions depend on family businesses, especially in
emerging economies and the developing world. Corporate governance is not just made up of
laws or regulations – it is a system of values. Consequently, improving business governance
in a family business is vital for social and economic progress and balanced growth in many
emerging markets around the world.
Conclusion
In Colombia, there is clear interest in good corporate governance from family businesses
and SOEs, as well as from other business entities such as co-operatives and non-profit
organizations. The broader impact of corporate governance in Colombia has been the start
of a broad dialogue about the principles of transparency, efficiency, and accountability.
The dialogue has had a positive effect on society as a whole, as the private sector’s
perspective has been given a more important role. The private sector used to be very critical
of the government’s problems in relation to corruption, lack of transparency, and
inefficiency, but the private sector failed to evaluate itself based on these same criteria.
Developed markets, where shares can be traded quickly and transparently, provide many
institutions, such as the increased sophistication and transparency of communication with
shareholders. While in developed markets there is a significant volume of information and
communication with shareholders, the information available to shareholders in developing
markets is often less sophisticated and less voluminous – leading to more opacity.
Additionally, companies in developed markets are required through the listing authorities or
through government regulation to give information to shareholders – in many developing
countries these mechanisms are weak or absent altogether.
On an international level, we should recognize that every emerging market has a unique
history and legacy that influences the behavior and attitudes of the private sector. The
development of corporate governance standards, processes, and procedures is indisputably
linked with the development of democracies in every emerging market and since corporate
governance is the catalyst around which the most efficient marrying of capital and
entrepreneurial organization can exist, it has become an absolutely crucial element on the
development agenda.